Is there anything left to say about KC-X? Of course. It’s a gift that keeps on giving. Besides, I’m an industry analyst, and I’m not expected to not write about KC-X. It would be like a trade lawyer shying away from billable hours in the US-EU aircraft WTO complaint. It just isn’t done. So here goes – the big KC-X issues and themes, in order of importance.

Fuel. This is the biggest issue, because it’s the biggest thing that’s changed over the past few years since the last KC-X contract. We’ve all known the terms of the competitive equation between the KC-30 and KC-767. The former plane is more capable, but it costs more to buy and burns more fuel. The added capability stayed constant. The higher price tag was reduced with a very aggressive EADS bid. But fuel is the one thing EADS could do nothing about.

Let’s look at the numbers. According to the authoritative Airline Monitor (November 2010), the average 767-300ER in US airline service burns about 1,550 gallons per block hour (Boeing’s tanker uses a smaller airframe, but more equipment, so we don’t know it’s exact burn rate). The average A330 in US airline service (-200s and -300s; the FAA doesn’t break them out, but the KC-30 too would carry more equipment) burns about 1,900 gallons per block hour. If fuel is $50/bbl, that fuel burn difference isn’t the end of the world. If you start with a base year assumption of $100/bbl, and then add the usual US Government fuel cost inflation factor for a 30 year life span, multiply it times X hundreds of flight hours per year times 179 aircraft, you get a fuel-related operating cost difference wide enough to drive a truck through. The EADS up-front price discount would have been dwarfed by this huge fuel cost divergence.

Everyone was wrong about this contract. Most analysts, commentators, politicians, and industry officials thought EADS would win. I was leaning in that direction too. Many analysts, myself included, also thought KC-X wasn’t executable. But if my fuel price thesis is correct, and the Air Force’s formula clearly shows a significant cost differential that isn’t outweighed by the KC-30’s superior capacity, then EADS might not have the grounds for any kind of sustainable protest. Both sides checked all 372 pass/fail requirement boxes, but that fuel expense change made one bid much more expensive. This would explain the Air Force’s confidence about its decision. And Northrop Grumman will have been proven correct – the tanker RfP was indeed a price shootout, or at least an operating costs shootout. Higher fuel prices eliminated any doubt about which way it would go.

As usual, Mad Men’s Don Draper said it best, “I hate to break it to you, but there is no big lie. There is no system. The universe is indifferent.” You can blame conspiracies, protectionism, or politics. KC-X probably came down to mere fuel prices. We see this dynamic in the commercial jetliner world too. High fuel prices helped the 777-300ER drive the thirstier A340-600 to an early grave. The higher fuel got, the less Airbus could do about it by discounting their less efficient product. However, Boeing now runs the risk of watching its baseline 737NG lose orders to the A320 neo. Even with a discounted sticker price, the lower fuel burn product will win. High fuel prices are a terrifying and neutral competitive arbitrator.

Frugality. This is the second biggest change (after fuel prices) since the last KC-X contract. FY 2008 saw a DoD procurement funding peak of $165 billion. The FY 2012 request (with OCO) is $128 billion. It’s headed downward. A few years ago, buying a more capable system had its charms, and the KC-30 offers an impressive additional lift capability. But today, everyone is focused on fighting the deficit, and frugal is the new mantra. The Tea Party types defected from the Republican-supported F136 JSF Alternate Fighter Engine for cost reasons. Lockheed Martin has moved from offering a larger Presidential Helicopter (US 101) to a smaller, less expensive one (S-92). Even without pricey fuel, a minimal tanker offering little more than a boom and hose/drogue pods is today regarded as a smart budget choice.

Stagflation. The two big trends above, frugality and expensive fuel, mirror a broader economic trend. Back in the ‘70s, when I was a future policy wonk, the term was stagflation, which meant that demand was weak and input prices were high. In this case, customer demand (DoD) is weak because the country is financially exhausted. But they also find themselves paying more for fuel, and most other commodities. The rise of China and other emerging economies mean high prices for oil, metals, etc., despite weak demand for them in the developed world. US and European airlines might just find themselves caught in this bind too. Airlines will need to spend more on fuel, yet US and European travel spend growth might slow, making it tough for the airlines to raise prices to cover higher costs. This could put a crimp in the industry’s recovery.

European politicians remain clueless about KC-X. Following the contract award, several European politicians and observers blamed the Boeing win on US protectionism. German Foreign Minister Raider Bruederle darkly warned of “possible further steps and consequences.” They did this on a knee-jerk basis, without any attention to jetliner economics or US defense budget trends or the red state/blue state dynamic behind US tanker politics. My March 2010 letter detailed this annoying phenomenon. I regret to report that European politicos are still doing it again. Then again, many US politicians choose to remain ignorant about foreign countries. Why should European politicians be any different?

Obama really can’t catch a break. On the subject of US politicians, conservative Republican Frank Gaffney, writing in the Washington Times days before the announcement, blamed President Obama for a purportedly imminent “scandalous” EADS victory. Immediately after the Boeing win, Conservative Republican Senator Richard Shelby blamed Obama and “Chicago politics” for the EADS loss. We’ve also had a very cold winter, and Obama is doing nothing to make the weather better.

On the positive side, it’s almost Spring. This month’s Teal Aircraft updates include the Special Mission and Fighter Aircraft market overviews, the F-16, A350XWB, 777, 787, and the B-1. Enjoy the exciting protest season.